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  • How to Negotiate Temporary Agreements or Contracts in Times of Crisis?

    The rapid spread of COVID-19 and the introduction of strict government measures are limiting or changing many businesses’ operations. These measures impose unusual restrictions that make it more difficult to meet certain contractual obligations. In such a situation, many companies will want to assess the possibility of modifying certain undertakings and terms of their contracts in order to get through the pandemic and resume their business activities post-crisis. To that end, we have gathered a few thoughts on how to look into negotiating a temporary agreement, some legal principles that can be applied to begin discussions and negotiations, and some other elements to consider in a negotiation approach, which we share with you below. How to do it and where to begin: some ideas It is relevant to review all your contracts and sort them to determine which are essential for your business operations and which have the most significant financial impact.  Think about the other contracting party as well, who may also be affected by the pandemic. Has the other party defaulted of performing its correlative obligations to you, or is your inability to meet your obligations causing it prejudice in any way?  Most of the obligations included in a contract cannot be changed unilaterally. However, contracting parties must still perform their respective obligations in good faith. The occurrence of an exceptional situation such as COVID-19 is likely to force each of the parties to act more flexibly in order to comply with their duty of good faith. It is possible to validate whether some of these contracts, by their very nature, are still relevant or whether they will remain relevant once the curve flattens and economic activity recovers. For less relevant contracts, you can check whether they include provisions allowing for unilateral termination, by the mutual agreement of the parties or by a particular mechanism. Otherwise, you could then consider initiating a discussion with the other contracting party to negotiate certain terms of the agreement in order to mitigate negative impacts, if any, during the pandemic.  For each contract that must be maintained, you can list all the obligations that you are unlikely to be able to meet, in whole or in part, as well as those that your contracting party might not be able to meet, in order to open the door to an out-of-court  negotiation of certain provisions for the coming months. In your analysis, you should pay particular attention to the following clauses: Default: What constitutes a default under the terms of the contract? What are the consequences of defaulting? Does a default under this contract constitute a default under another contract? Does the contract provide for a time period to cure a default? On what conditions? Time limit: Does the contract set specific time limits for the performance of certain obligations? Which ones? Does the contract provide for the possibility of postponing the time limit for its performance? Should a notice be sent to this effect? Does it expire soon? Exclusivity: Is the contract exclusive? Can this exclusivity be overridden? Under what circumstances and on what conditions? Force majeure: Does the contract include a superior force clause (most commonly called a “force majeure”) forgiving a party’s inability to perform its obligations? What happens to each party’s obligations, especially financial obligations, in a context of superior force? Although the Civil Code of Québec defines such a notion, the contract can always provide its own definition. A case of superior force usually requires the presence of an unforeseeable, irresistible event external to the party invoking it. Continuous information: Does the contract provide for the obligation to keep the other contracting party informed when certain events occur? If so, which ones? Is COVID-19 or any other pandemic included? Negotiation: Does the contract provides for the parties the possibility to renegotiate certain terms ? Which ones? When? On what conditions? Payment: Does the contract set out time limits for payments to the other contracting party or for making any other kind of payment, depending on the nature of the contract? Does it provide for additional time limits to proceed to the payments? What is the impact of delaying or not making a payment? Financial performance: Does the contract establish financial performance criteria (e.g. compliance with certain financial ratios)? How often? What are the consequences of not meeting these financial criteria? Penalties: Does the contract contain penalties for late payment of certain amounts or for failure to meet certain contractual obligations? When is this penalty due? What amount can it reach? Liability: Is the liability of the contracting parties unlimited under the terms of the contract or does the contract instead provide for limits on the amount that may be claimed?(maximum/minimum amount)? Is there a predetermined time limit to make a claim? Does the contract provide for a notice to be sent to this effect? Dispute resolution: Does the contract provide for a dispute resolution process? Mediation or arbitration? Under which conditions can these mechanisms be applied? List all the impacts that result from a breach of obligations (e.g., penalties, notice of default, interest), and make a list of viable proposals that you can submit to the other contracting party as an alternative. What legal principles can you use to negotiate a temporary agreement with your contracting party or a postponement of your obligations?  Certain provisions or legal principles may make it possible to terminate a contract or may serve as arguments for a temporary agreement or a postponement of your obligations. Here are a few examples. (This list is non-exhaustive, of course.) Force majeure Some parties to a contract will want to invoke the concept of superior force to terminate or temporarily suspend the effects of the contract. Although this concept is interesting, it applies only to very specific situations and its application is not generalized. As previously mentioned, the Civil Code of Québec1 provides that superior force is an unforeseeable and irresistible event that must not arise from the actions of the contracting parties. Depending on the nature of the obligations covered, a contracting party may be released from its obligations or have its successive obligations suspended during the superior force period. The contract may also provide for other parameters and circumscribe the terms of what may constitute a case of superior force between the parties. The right to invoke superior force requires a case-by-case assessment of each contract and of the relationship between the parties. In any event, a party that is unable to perform its obligations, in whole or in part, must take all steps at its disposal to minimize its damage. You will find more information on the concept of superior force and its application in the bulletin The Impact of COVID-19 on Contracts.  Right to terminate Certain contractual provisions may allow for resiliation (termination) by either party, on specific terms or for specific reasons. Some contracts will provide for a termination mechanism at either party’s discretion or further to their mutual consent.  In the absence of such clauses in the contract, it remains essential to characterize the nature of the contract, since legislative provisions could allow its resiliation. That is also the case of a contract of enterprise or a contract for services, which the client may unilaterally resiliate as permitted by sections 2125 and following of the Civil Code of Québec, subject to certain limits, of course. Before deciding to unilaterally resiliate a contract, it is important to consult your legal advisor in order to properly determine the nature of the contract, validate its terms and conditions with respect to resiliation and determine the possible impacts of such resiliation (e.g., penalties, prejudice to the other party, etc.). Obligation of good faith in contractual performance The obligation of good faith imposes certain contractual duties, including those of loyalty and cooperation. The duty of loyalty entails certain prohibitions such as not increasing the burden on a contracting party, not compromising the contractual relationship, and not engaging in excessive and unreasonable2 behaviour. The duty of cooperation, on the other hand, is more positive in nature and aims for assistance and collaboration between the contracting parties to encourage contract performance. Thus, beyond the contractual relationship between the parties, the obligation of good faith allows for a genuine collaborative relationship, a partnership, even, between the parties. A party being a victim of its contracting party’s actions, which are not in accordance with its obligation of good faith under the terms of the contract or which are implicitly derived from those terms, may be in a favourable position to claim damages. Thus, if a party experiences difficulties in performing its obligations because of an event beyond its control, it is entitled to expect the other contracting party to show good faith in the performance of the contract and to act reasonably. Abuse of rights  A party’s exercise of its contractual rights may, in certain situations, constitute an abuse of rights. For example, a party that is in default of its payment obligations under the contract, due to the closure of its business as required by government authorities, may trigger the application of a contract default clause by the other party. Such other partycould proceed with the immediate resiliation of the contract upon simply providing notice. While the terms of the contract may be clear, the other party’s haste in resiliating the contract may constitute an abuse of rights. Indeed, the nature of the relationship between the parties, the duration of the business relationship and the facts that led to the default have an impact on the way a party may exercise its rights under the contract. The exercise of rights provided for in the contract in such a way as to create devastating or catastrophic effects for one of the contracting parties could constitute an abuse of rights in the performance of the contract. Mediation The contract may provide for dispute resolution processes such as mediation or arbitration. To the extent that a dispute arises between the contracting parties and that the contract provides for recourse to alternative dispute resolution mechanisms, it will be possible or even mandatory to submit the dispute to a process such as mediation before a third party, which will attempt to help the parties find an acceptable common ground. In the event of non-performance by a contractual party, this may be a very good option, insofar as the contract contains a provision providing for recourse to such mechanisms, of course. How can a temporary agreement be negotiated, and are there elements that can be put forward as part of the discussions? Given the exceptional current situation, it may also be appropriate for the contractual parties to communicate and verify the impacts of the pandemic on the contractual performance. In this way, the parties may jointly conclude that there are particular difficulties in performing certain obligations under the contract. In such a case, propose solutions or present scenarios that aim to minimize the negative impacts for your respective businesses. Rely on the mutual aid factor to meet certain obligations and/or suspend others (performance, manufacture, delivery, time limits, forbearance, etc.). It is possible to suggest performing certain obligations in consideration for the performance of your contracting partner’s correlative obligations. Where feasible, consider partial payments, deferred payments, staggered payments over time or a reimbursement based on a percentage of revenues or sales once operations resume after the pandemic. If it is possible, offer additional guarantees to the other contracting party (e.g. collateral security, personal suretyship, third party guarantee). Validate whether your insurance covers the cessation of your operations, business interruption, delays in the performance of your obligations, or financial losses arising from some of your contracts, to enable you to propose viable alternatives.  Determine which suppliers or partners are willing to conclude a temporary arrangement and those who refuse or are less open to it. You can then to try to optimize your agreements with the more conciliatory partners, allowing you to continue performing certain obligations with your more reluctant contracting parties. Innovate! Think about alternatives that might not have been possible, or that you might not have considered before the pandemic, that allow you to optimize your business practices or relationships. In short, think outside the box. A few thoughts before undertaking a negotiation  Do not restrict your thinking to the period of restriction on non-essential activities which is, at the time of writing, until May 4, 2020.  Think instead about the weeks and months that will be required to re-establish your business relationships and resume normal business operations, while performing your ongoing obligations and any deferrals negotiated during the pandemic; The inability to adapt, or the maintenance of a hard line, will bring some businesses to the brink and force them to consider various insolvency processes. You must be in a position to show your contracting parties why a position that is too firm or inflexible will not, in the long term, be satisfactory or serve the parties’ interests, in addition to being detrimental to those parties who are likely to require flexibility in the performance of their contractual obligations. You need to be able to identify the considerations specific to your business and business model, and determine the elements that may influence your decisions, such as the nature of the relationship with the other contracting party, particularly if it is a long-standing customer or supplier, whether it is a relationship that will continue into the future or if it is a one-time contract that is non-recurring, and what impacts and reputational risk your actions may entail. Beyond legal principles, the long-term business relationship must be prioritized and protected. This argument should not be underestimated. The objective of most Quebec businesses is to find satisfactory common ground for the parties involved, while trying to minimize the impacts on both sides. The watchword the parties should keep in mind is “flexibility.” During these times when solidarity is in order, it seems to us that it would be wise for each party to make the effort to reach a duly negotiated temporary agreement. We are sharing these options to provide you with ideas on how to approach the negotiation of ongoing contracts, knowing that each contract, relationship and situation are  unique. For more information, our corporate law team remains at your disposal to accompany you during the pandemic. #WeWillGetThroughThis   Section 1470 para. 2 C.C.Q. Didier Luelles, La bonne foi dans l'exécution des contrats et la problématique des sanctions, Canadian Bar Review, Vol. 83, 2004, pp. 189-190.

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  • How to be a Good Franchisor in the COVID-19 Era?

    In recent weeks, and especially in recent days, we have seen the serious repercussions of the spread of COVID-19 on Quebec businesses and SMEs. Government authorities are planning financial assistance measures for businesses, and some chambers of commerce have already announced that new services will soon be offered to businesses to help them deal with the crisis. We are as yet unaware of the details of this assistance and how it will be allocated.  In the meantime, what will happen to companies with a franchise business model that are required to meet certain financial undertakings and standards as part of their day-to-day operations? During these unpredictable and uncertain times, how can you be a good franchisor and support your franchisees? Assistance and guidance from franchisors is important in a situation like this. It can take different forms, some of which are described in this bulletin.  This is an extraordinary opportunity to show franchisees that you are a caring provider that considers the survival of their businesses to be a priority.  Here are a few suggestions for supporting your franchisees over the next few weeks, if not the next few months: Give them a temporary break from their financial obligations under the franchise agreement, both in terms of paying royalties and contributing to the advertising fund. In the short term, this will cause you to lose a source of income. However, it will ease the financial pressure on franchisees and allow them to get through this crisis and eventually return to normal operations. If your franchisees are lessees (whether they have a storefront or shopping centre lease), join them in their negotiations with the landlord to try to obtain temporary flexibility in the terms of their leases, such as a suspension of rent payments, a reduction of payable rent or a deferral of payments that will be spread out over several months once the effects of the COVID-19 crisis have subsided, since rental costs are generally a major expense for franchisees. On the other hand, if as a franchisor you are subletting premises to your franchisee, accept the risk of negotiating payment arrangements or taking on a portion of the rent to temporarily relieve the franchisee’s financial burden. Work in collaboration with franchisees to modify their services (take-out food, virtual workout program for gym clients, delivery, increase in online offerings, etc.) while respecting your standards and requirements in order to maintain consistency between the franchises. Allow your franchisees to temporarily cease operations or reduce business hours to minimize certain expenses such as payroll and supply (in this regard, we invite you to read The Coronavirus Guide for Employers: Everyday Measures for the Workplace). Revise some of your standards and policies and provide updates to be adopted by your franchisees (particularly for hygiene and sanitation). Take advantage of these turbulent times to develop new virtual training courses, encourage franchisees to participate in continuing training activities during this period by offering free webinars, or set up virtual brainstorming sessions to innovate and plan for after the COVID-19 pandemic. Temporarily share a portion of supplier rebates with your franchisees, if your franchise concept allows you to collect rebates directly with no obligation to remit them to the franchisees. Develop a marketing strategy for current services or a new temporary offering during the crisis in order to maintain brand visibility. For the benefit of your franchisees, renegotiate certain agreements with suppliers to get better services or rates (e.g. telephone service, internet, inventory, percentage discount on goods useful for operating the business). Facilitate your franchisees’ discussions with their financial institutions, which are currently sensitive to the tense financial situation of Quebec entrepreneurs and willing to find solutions. If you have an online sales platform, establish a policy that allows franchisees to benefit from it, at least temporarily, either by sharing a certain portion of revenues or, for example, delivering to the franchisee closest to the consumer. For franchisees that, tragically, will not have the financial capacity to overcome the crisis, support them through the end of their operations and transition, in order to minimize their losses. If necessary, offer your franchisees phone or virtual assistance and provide them with contacts who can answer their questions and support them. Provide the public with a general message on the status of your network’s products and services offering, and showcase your support to your franchisees in order to convey a clear and consistent message that will sustain your brand and approach. Most of these proposals involve a greater financial commitment on the part of the franchisor. However, it is important to remember that a franchisor has an obligation to collaborate and partner with its franchisees. Of course, no one is bound to achieve the impossible. A franchisor’s capacity to adequately support its franchisees during this difficult period will serve its interests and those of the network in the longer term. Assistance provided by the franchisor will allow more franchisees to survive and resume their activities when the situation improves. The franchisor’s support and, particularly, flexibility with respect to financial obligations arising from the franchise agreement will send a clear message to franchisees that they are not left to fend for themselves during this period of uncertainty, and a greater climate of trust will be established in your franchisor-franchisee relationship.  Moreover, all sectors of Quebec’s economy are affected by the pandemic and a solidarity movement is being established among institutions, financial partners and businesses to implement solutions and strategies to promote trade and the resumption of economic activities. We are following developments on a daily basis. Our franchising and distribution team and all our professionals are at your disposal and offer you their expertise in advising and supporting you in meeting the challenges that the current COVID-19 situation may create for your network. Please do not hesitate to contact us. It will be our pleasure to collaborate to find a solution that is right for YOU. It’s time to stand together!

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  • 5 keys to successfully sell your franchise system

    Though it doesn’t happen often, some franchisors start a franchise system with the goal of selling it in the short or medium term. However, the quality of the infrastructure required to build a viable franchise system and the amount of resources (financial or other) that need to be invested over time is likely to lead such franchisors to reconsider their initial goal and either develop a strategic partnership or simply cave in and sell their franchise system to a competitor. Given that a potential partner or buyer will likely carry out due diligence to substantiate the business opportunity, it is preferable to determine what issues may compromise or interrupt negotiations and try to resolve them in advance. Identifying issues in the relationship with franchisees and making the necessary adjustments Before thinking of selling all or part of your franchise system, you should assess the quality of your franchisees and your relationship with them. If you have conflicts with some of them, it is high time to resolve them. Unless faced with an isolated case that you have already taken steps to resolve, your potential partner or buyer may react negatively upon learning that some franchisees in your system are critical of the franchisor and may fear the impact that claims could have on the franchisor’s image, concept and brand. The most frequent criticisms against franchisors are related to a lack of support and collaboration, a lack of transparency in the use of national advertising funds, a concept and/or operations that aren’t viable, and the belief that the franchisor does too little for its franchisees. To learn if your system harbours any such criticisms, you should not visit your franchisees only to assess the quality of their operations. You should give them the opportunity to openly discuss the challenges and situations they face with your management team. It is always better to get franchisees to confide directly in their franchisor rather than letting dissatisfied franchisees discuss their points of contention between themselves. A better understanding of the state of your franchise system will make it possible for you to be more transparent in disclosing the issues underlying a potential transaction to your prospective buyer. Even if such transparency may lead to a lower sale price, it avoids the financial consequences of incomplete or inaccurate representations that you may make to the future buyer and helps to maintain trust. Reviewing and structuring documentation As part of its due diligence, the buyer and its lawyers and financial advisors will review all key aspects of the franchisor’s system, including contracts (franchises, leases, suppliers, etc.), intellectual property and accounting. Missing or incomplete documentation will likely discourage the buyer and justify a reduction in the sale price, or, even worse, withdrawal from the proposed transaction. It is therefore essential, before the buyer’s due diligence begins, that you instruct your resources to verify that your documentation is compliant and reliable, correct any deficiencies and obtain missing information, if any, even if it means hiring external consultants. Compiling your system’s financial information A potential buyer will undoubtedly want to analyze your financial statements and tax returns. It is also very likely that it will want to consult accounting records and verify some key performance indicators. Thus, your system’s monthly sales (compared to those of previous years), geographic trends, how profitable franchisees’ operations are and how frequently they pay their royalties will certainly be of interest to a buyer. In addition, a diligent buyer will pay close attention to a franchisor’s contractual obligations towards third parties, such as lessors and suppliers, and any warranties that it may have made to third parties. In short, full and structured disclosure of the financial information underlying your system will make it easy to demonstrate future profitability. Negotiating an advantageous Earn-out clause Negotiating the sale price of a franchise system can be done in different ways. In addition to the traditional EBITDA valuation of the business, it is not unusual for a franchisor (whose management will ensure an operational transition after the sale) to negotiate an upward adjustment to the sale price should the franchisor achieve, after a determined post-transaction period, better financial results than those on which the buyer based its valuation of the sale price (the “Earn-out”). For example, the sales agreement could provide that a sum equal to the increase in EBITDA that the franchisor achieves during the Earn-out period, multiplied by the EBITDA multiple applied to the transaction, be paid in addition to the sale price. Limiting the chances of your transaction failing by choosing a suitable buyer Make no mistake: a transaction isn’t concluded upon signing a letter of intent. There’s still a long way to go. A multitude of conditions in favour of the buyer generally need to be fulfilled in order for the transaction to proceed. Stipulated time limits often need to be extended by mutual agreement for the parties involved to cover all bases and close the sale. This doesn’t mean that you must consent to all the buyer’s requests to extend time limits. While delays in a transaction are usually well-founded, sometimes a buyer tries to buy time in order to exert pressure on the seller, or it will do so to finish due diligence that it deliberately made more complicated in order to find arguments justifying a decrease in the sale price./p> To avoid such an unfortunate situation, it is in your interest to be well informed about your potential buyer and how it handled past transactions. To assist you and make the best of your business model, feel free to contact a professional of our team!

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  • The 5 key factors to consider before becoming a franchisor

    Our team is frequently consulted by entrepreneurs asking the following question: we want to franchise our business concept, so where do we start? One of the most common scenarios involves a very enthusiastic customer approaching the owner of a new business concept with some local success (such as a restaurant) and offering to buy a franchise. It is quite common for the business owner to quickly accept this offer in hopes of becoming the next Subway. Unfortunately, many entrepreneurs do not realize that successfully running one or two locations requires very different skills and abilities than those required to develop a franchise network. So, rather than becoming the next Fred Deluca, they are soon faced with challenges resulting from the poor choice of franchisees, inefficient locations, an ineffective supply system and the inability to maintain a uniform concept with the few franchisees they have managed to recruit. As a result, one or more franchisees will most likely stop paying their royalties, close their doors and, guess what – blame the franchisor for the losses incurred. Having represented several franchisors over the past 15 years, we recommend that entrepreneurs pursue the franchise business model only if they are able to meet the following criteria: 1. The concept is viable and the business model is profitable The fact that one location is generating a profit does not guarantee that the concept is viable or that the business model is profitable. In order to be able to draw such conclusions, we strongly recommend that entrepreneurs run at least two, or ideally three, corporate branches (regardless of concept type) in different markets for a period of at least 18 months. Like any entrepreneur, a franchisee normally assumes some business risks related to the choice of location of the franchise and the quality of its operations. However, the franchisee should not share, or suffer from, business risks related to assessments that the franchisor should carry out before granting the franchise.Like any entrepreneur, a franchisee normally assumes some business risks related to the choice of location of the franchise and the quality of its operations. However, the franchisee should not share, or suffer from, business risks related to assessments that the franchisor should carry out before granting the franchise. 2. The concept and business model can be replicated Ideal demographics and geographic locations, supply costs (or sources), elements that may be difficult to replicate and even the unique expertise or charisma of the founder are all factors that influence the success of a business concept and should be taken into consideration before developing a franchise network. The franchisor must have a business concept that a qualified franchisee can operate without being in the same shoes as the franchisor. New franchisees, who will have different business experience than the founder in most cases and whose franchises will be located in different markets than the original, must still be able to easily replicate the franchisor’s concept with the same success by following the system that the franchisor carefully laid out in advance. 3. Recruiting franchisees is actually possible Wanting to sell franchises is an admirable goal, but there must also be a sufficient pool of candidates who meet the franchisor’s selection criteria. For example, franchising a shoe repair shop might seem like a good idea, in order to standardize customer service and modernize the environment in which this type of service is offered. Nevertheless, using the same example, it is important to determine whether there are enough candidates in the trade to consider developing a franchise network in the industry and to ensure that some shoemakers are ready and willing to convert their current businesses to franchises and continue operating under the branding of a third party. 4. The franchisor’s team has sufficient resources to properly train and support the franchisees Our team was recently called upon to resolve a franchisor-franchisee dispute that perfectly illustrates the issues that can arise from a lack of experience or resources on the part of the franchisor. The franchisor fell victim to the enthusiasm of many prospective franchisees for its seemingly viable concept and profitable business model and collapsed shortly after starting its franchising operations. After franchising some 20 businesses in a short period of time, the lack of support from the franchisor in choosing locations and layout, a poor understanding of key industry performance indicators, a flawed supply system and incomplete initial training of franchisees led to the collapse of the network. Even if it means slowing down the pace of development, franchisors must ensure that they have sufficient infrastructure in place to support the growth of the network. Poor choices made while developing a franchise network can have negative effects for several years, not to mention the impact these choices can have on the future success of the franchisor. 5. The franchisor has sufficient financial resources Developing a franchise network in accordance with the above recommendations requires excellent capitalization. The initial franchise fees and royalty payments from the first franchisees are not enough for the franchisor to cover the development of sufficient infrastructure to ensure the viability of the network. The vast majority of franchisors who have challenged this basic rule are now facing serious difficulties.

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  • How to expand your franchise network in Quebec?

    In the latest edition of the Franchise Voice magazine published by the Canadian Franchise Association (CFA), discover the article "Franchising in Quebec", illustrating some of the particularities that distinguish Quebec from other Canadian provinces in the Franchise industry. Whether you are a Canadian or foreign franchisor, this article written by our professionals reviews the legal essentials to grow your franchise Quebec project : Read and download this publication

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